Tuesday, January 29, 2008

Mr. Blankfein cuts an unusual profile for a Wall Street chief. He put himself through Harvard College and Harvard Law School on a combination of scholarships and financial aid. He took a job in a Los Angeles law firm working on tax-related issues for the film industry before detouring his legal career in 1981, joining a relatively obscure commodities trading firm, J. Aron, as a gold salesman. At the time, J. Aron had just been bought by Goldman Sachs.

In 1994, Mr. Blankfein was made co-head of the J. Aron Currencies and Commodities business. In 1997, the year before the markets cracked under Russia's default and the near collapse of the hedge fund Long-Term Capital Management, Goldman's bond trading group was merged with the J. Aron unit to create "FICC" — fixed income, interest rates, currencies and commodities. Mr. Blankfein became co-head of the joint division. By 2002 he was head of all sales and trading.

Goldman has blazed a path in Wall Street by transforming itself from a traditional investment bank that offers big-name corporate clients advice on deals and capital management to a fast-growing investing giant that is willing to make big bets with its own money.

Goldman's growth is increasingly in trading derivatives and commodities, in servicing the ballooning class of hedge funds and private equity firms as well as managing its own hedge funds and investing in pipeline companies, toll roads and golf courses. Mr. Blankfein, 51, who has been president since 2004, has been instrumental in sharpening this focus.

But with change, there is risk. Skeptics naturally abound and some employees and clients wonder whether the strategy is skewing Goldman's long people-focused emphasis on putting the client first.

"There's a trading division culture, there's an investment banking culture and an investment management culture and they are all different. Earleir, the dominant culture used to be investment banking and now the dominant culture is trading, and in the trading business, people are fungible. It's not good or bad, but it's a cultural change.

After 137 years as an independent firm and 7 years as a public company, Goldman Sachs exudes mystique as no other firm does. As finance has globalized and banks have completed their transformation from secretive private partnerships to still largely secretive, bureaucratic public companies, Goldman has retained its intrigue.

Its brand remains the uncontested leader on Wall Street and its breadth is continually reflected in the fact that it frequently experiences conflicts of interest in its deals because it operates in so many businesses in so many parts of the world.

Mr. Blankfein's sharp focus on results has been apparent since 2002, when the trading and principal investments division produced 52 percent of the firm's revenue and earned him a higher salary, $12.7 million, than his boss, Mr. Paulson, who made $9.6 million.

His ascension to the presidency came as Goldman's two co-presidents, John Thain and John Thornton left. In early 2003, Mr. Thornton left to teach in China and by the end of the year, Mr. Thain accepted an offer to run the New York Stock Exchange. Mr. Blankfein was named president.

Unlike Mr. Paulson, who rose through the ranks of Goldman as a banker, Mr. Blankfein has his roots in sales and trading, the more rough and tumble world of Wall Street. Colleagues describe Mr. Blankfein as witty and charismatic. But investment bankers have complained that he does not spend enough time with their clients.

Today, while it remains the top- ranked bank in global and American mergers and acquisitions, power within the firm has clearly shifted to trading, where revenues drive the bottom line. In 2001, investment banking produced 15 percent of revenues and trading and principal investments produced 53 percent. In 2005, investment banking produced 15 percent of the firm's net revenues, and the trading and principal investments group was responsible for 66 percent.

That shift is partly a result of market conditions — investment banking suffered after the technology boom ended and growth in the stock business has slowed, while low interest rates have fueled record buyouts and huge profit opportunities for banks willing to put their capital at risk.

But the strategy has also been decided upon by management committees willing to embrace a culture of taking more risk with its capital. In this arena, Goldman Sachs and Mr. Blankfein have paved the way.

Value at risk, the only available measure of risk for investors, is supposed to measure how much money could potentially be lost in trading positions because of unpredictable markets and measured by some degree of confidence. In November 2000, that figure was $25 million. In the first quarter of 2006, the average was $92 million.

Goldman executives say the firm takes more risk with substantially more permanent capital behind it, and emphasizes that most of the risk it takes is for its clients.

Perhaps the greatest challenge Goldman faces is the conflicts from its various businesses. The bank recently raised a $8.5 billion private equity fund, which it has used to bid on deals with clients, against clients and in deals in which it is advising the potential bidding group. In a series of high-profile deals in London, Goldman was leading consortiums or parts of ones making bids that appeared to be unsolicited for companies like ITV, the British broadcaster; Mitchells & Butler, and Associated British Ports.